After decades of stockpiling cash and shirking the market, it looks like Japanese citizens are finally experiencing the dawn of their investing revolution.
In January, the nation’s government mandated a ground-breaking expansion to their analogue of the UK Isa – the Nippon Individual Savings Account, or 'Nisa'.
Two months on, all the early signs suggest Japanese citizens are taking full advantage of the expanded scope for permanently tax-free investments now available.
Flows into Japan-listed open-ended funds are multiplying, stock purchases are hitting record levels, and new accounts are being opened by the hundreds of thousands.
Right now, a significant portion of these investments are flowing into international, rather than domestic, stocks.
However, we expect a reappraisal of the opportunities in the domestic equity market as prevailing inflation and corporate governance reform continue to erode Japan’s historic scepticism towards its home market.
These tailwinds are already attracting record inflows from foreign investors, helping the Nikkei to stage an incredible bull-run over the past year.
As they continue to attract Japan’s growing domestic investor population, we expect this market strength to be sustained over the long term.
Tax-free investment
The Nisa is a tax-exempt government investment account that can be opened by anyone over the age of 18 in Japan. Modelled on the UK Isa, the product was introduced by the Japanese government in 2014 to encourage retirement saving among citizens.
Nisas enjoyed some success in their first decade. As of the end of last year more than 20mn of them were open, holding some ￥34tn (£177bn) of tax-free investments.
What the government did not manage, however, was to overcome Japan’s historic, systemic aversion to investment risk.
Alliance Bernstein figures suggest Nisas remained heavily unused, with just 17 per cent of the Japanese population holding accounts. That is far below the 52 per cent of Brits thought to have an Isa by the end of 2019 to 2020.
Instead, it was estimated that more than half of Japanese household assets totalling ￥2.1qn (£10.4tn) remained in cash and deposits.
As the Financial Times recently put it, this sum alone is equivalent to the combined annual gross domestic product of Germany and India.
In comparison, US and UK households currently hold just 13 per cent and 31 per cent of their respective assets in cash and deposits.
Expanding Nisa’s scope
A nationwide habit of hoarding cash rather than investing is an issue for Japan, particularly against a backdrop of low interest rates. It can reduce consumption and stifle economic growth. It can also hinder wealth accumulation and retirement planning on an individual level.
It appears to be these concerns that have ultimately led Japanese Prime Minister Fumio Kishida to expand the scope (and in turn, increase the appeal) of Nisas significantly in January this year.
Changes included the introduction of a lifetime tax exemption for individuals’ equity investments. The exemption previously lasted up to 20 years. Likewise, the limit on annual contributions was trebled to ￥3.6mn while the maximum total contribution was raised to ￥18mn.
